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This page is a year by year account of HealthSouth's progress to giant to fraudster to rehabilitated company.
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The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made. Material contained here represents my views based on my study of the operation of the health care marketplace and the material available to me. It should not be assumed to represent the views of any other individual or organization.
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With three friends and $55,000, Mr. Scrushy and Mr. Beam started HealthSouth in 1984 and took it public in 1986.
The Scrushy Mix: Strict and So Lenient The New York Times April 20, 2003
This page describes the rise and fall of
HealthSouth and some of its linked companies year by year. Please
note that in a controversial jury decision Richard Scrushy was found
not guilty of the fraud for which others at HealthSouth claimed he
Scrushy, Aaron Beam, and a number of close associates form HealthSouth. It was financed "with venture capital from New Enterprise Associates of Baltimore. New Enterprise co-founder Charles W. "Chuck" Newhall III, a major figure in the venture trade, has served on HealthSouth's board ever since." Aaron Beam became the Chief Financial Officer.
Scrushy seemed to have his own ideas about accounting. Ernst and Young became the company's auditors when others were, it is alleged, sacked because they would not do what Scrushy wanted. William Owen, an accountant from Ernst and Young moved to HealthSouth as controller. He later set up and supervised the accounting fraud.
Amcare Inc., the company that became HealthSouth in 1984, couldn't convince auditors KPMG that its books were reliable, prosecutors said in a court notice that outlines additional evidence they plan to present to jurors at the former chief executive's accounting fraud trial. Scrushy's response: He fired them, the government said.
Prosecutors add new Scrushy allegations The Business News July 01, 2004
The board is joined by another Venture capitalist C. Sage Givens who soon develops a close relationship with Scrushy. She was later involved in many business ventures with him.
The company goes public. The US Securities Exchange Commission (SEC) alleges that the fraudulent accounting practices went back to 1986 or even earlier but they have not produced evidence of this. If the accounts did not meet Scrushy's requirements, it was alleged, then they were simply sent back to be fixed.
In all probability the fraud started gradually with minor adjustments to the accounts made by Beam in response to Scrushy's insistence that the accounts meet his requirement that they meet analyst's expectations and so maintain the value of shares.
The company started its rapid growth buying and building rehabilitation hospitals, outpatient rehabilitation clinics and later diagnostic services and outpatient surgery centres. Over the next 12 years it would become the Pacman of rehabilitation and outpatient surgery. I do not have information about its earlier purchases.
Scrushy and his partners would also spawn a coterie of interlinked and cooperating personal and public companies to exploit the opportunities provided by the health care market. It would later be claimed that their business dealings with one another were not appropriate.
Scrushy and his close associates would tightly control the companies and their directors. Conflicts of interest would simply be ignored.
While HealthSouth was successful and the darling of the marketplace no one questioned these arrangements. Scrushy and his associates rewarded themselves very handsomely. Over the succeeding years Scrushy built his reputation as an eccentric multimillionaire and magnanimous philanthropist. His local Birmingham, Alabama community came to worship him.
The earliest fraud described by a witness is in 1989. One possible reason for a lack of attention to these earlier years is that most of the fraudulent crimes were covered by a 5-year statute of limitations so the earliest fraud could not be pursued. Bank fraud was covered by 10 years. The first CFO AARON Beam, who started the fraud during these years, was consequently prosecuted for bank fraud.
Mr. Beam and Mr. Scrushy, who together started HealthSouth in 1984, gave those false statements to a syndicate of 32 lenders that amended a $1.25 billion line of credit to the company in April 1996, the papers said. One of those lenders, AmSouth Bank corporation in Alabama, lent $55 million, the papers said.
At the hearing, Maron Webster, a former internal auditor at HealthSouth, testified that Mr. Scrushy fired him in 1989 after he questioned accounting at a company operation in Miami.
Mr. Webster said when he raised concerns about what he thought were improperly booked receivables, Mr. Scrushy said, "we're under certain pressures to make certain numbers," according to Mr. Webster's testimony. "We have an obligation to stockholders and shareholders."
Fifth Chief Financial Officer at HealthSouth to Admit Fraud The New York Times April 25, 2003
Geoffrey E. Harris, a market analyst joins Benjamin D, Lorello at Smith Barney and begins a lucrative career giving strongly positive stock evaluations to HealthSouth and a number of associated corporations. This brings in billions of dollars of business from HealthSouth for Lorello and Smith Barney, by arranging loans and floats to support the company's expansion. HealthSouth's stock value increases as a result enabling it to secure bank loans and use stock in takeover endeavours. Between 1995 and 1998 the stock value would increase by 250% reaching US $30 in 1998.
The allegations about this relationship with
Lorello suggest that it was Harris' optimistic profit projections
which HealthSouth's accountants were required to match. If it failed
to do so its share price would fall and it would be unable to
Harris and Lorello built their reputations around HealthSouth. Harris' accurate predictions (so carefully reproduced by HealthSouth) and Lorello's successful business dealings were richly rewarded by their employers.
Caremark a company HealthSouth will later buy is spun off from Baxter, probably in the midst of a fraud investigation.
Scrushy and close associates establish MedPartners, a Physician Management business. HealthSouth's Larry House becomes chairman and CEO.
Martin a CFO who succeeded Aaron Beam later described how he continued the fraud during this period.
Under questioning from Clemon, Martin said he and Scrushy first discussed falsifying numbers in 1993 when he was an executive in the accounting department.
``We were going to miss earnings and we had to make an acquisition to make it up,'' said Martin - - - he said Scrushy told him to ``fix'' earnings shortfalls virtually every month during that time. ``If we weren't making the numbers he would say, `Go figure it out,''' said Martin. Ex - HealthSouth CFOs Plead Guilty to Fraud New York Times May 1, 2003
Scrushy and two partners profit handsomely by forming a publicly traded real estate investment trust, Capstone, which is funded by HealthSouth. It purchases facilities from HealthSouth, Integrated Health Services, Surgical Health and Scrushy's private holdings, then leases them back. Scrushy is a director of the three companies.
1994: HealthSouth becomes the largest provider of comprehensive rehabilitation services in the U.S. with 250 locations.
Chronology of HealthSouth Developments New York Times November 5, 2003
MedPartners buys Pacific Physician Services for US $332 million and Mullikin Medical Enterprises for US $414 million.
Caremark reaches a US $161 million criminal fraud settlement relating to kickbacks paid in its home infusion business. It enters into an integrity agreement. It has in the interim diversified into Physician management, a pharmaceutical business, and rehabilitation. At some stage it acquires an international Home Infusion business in Europe and Canada. Caremark now sells its US infusion business to Coram Healthcare.
HealthSouth buys Caremark's 150 rehabilitation facilities for US $127.5 million and NovaCare's inpatient rehabilitation hospital division for $215 million. HealthSouth buys Surgical Health, a company where Scrushy is already a director. Capstone is sold at a massive profit.
The company (HealthSouth) was on a buying spree: in 1995, it announced almost $2.5 billion in acquisitions, and it paid Mr. Scrushy $1.7 million in salary and a $5 million bonus. The Scrushy Mix: Strict and So Lenient The New York Times April 20, 2003
1996: After years of quick growth with Scrushy as CEO, HealthSouth operates in all 50 states and eventually bills itself as the nation's largest provider of diagnostic imaging, outpatient surgery and rehabilitation services.
Chronology of HealthSouth Corp. LA Times Associated Press January 24, 2005
Caremark reaches a US $42.3 million fraud
settlement with 10 insurers. MedPartners acquires the rest of
HealthSouth invested in 21st Century Health Ventures a private company formed by Scrushy, Martin and Hicks another HealthSouth executive who later pleaded guilty to fraud. It invested for them over the years.
A series of whistleblower Medicare fraud Qui Tam lawsuits are commenced extending through to 2001 but they are not made public.
The company is now the darling of the marketplace and its confidence knows no bounds. Supreme confidence causing companies to overreach themselves was a feature of the health care marketplace and their senior executives at this time. They could do no wrong and whatever they did was seen as acceptable. HealthSouth's expansion accelerates
1997: HealthSouth moves to a new headquarters, 1HealthSouth Parkway ,Birmingham ,Ala.
Chronology of HealthSouth Developments New York Times November 5, 2003
This exuberance is reflected in an offer to
buy the giant Columbia/HCA
for US $30 billion after its fraud investigation commenced. Scrushy
indicates his interest in expanding into the United Kingdom and
Australia. HealthSouth makes initial purchases in both countries. It
buys 71 bed Cedar Court Rehabilitation Hospital in Melbourne in
HealthSouth acquires Health Images (diagnostic imaging) for $270 million and ReadiCare (occupational health) for $70 million using stock
House a director of HealthSouth rapidly expands MedPartners which is backed by Scrushy/HealthSouth money. Scrushy is a director. It plans to follow HealthSouth strategies.
HealthSouth purchases Horizon/CMS, for US $1.6 billion and sells the bits it does not want to Integrated Health Services where Scrushy is also a director for US $1.3 billion.
Horizon/CMS, an offshoot of the infamous National Medical Enterprises (NME) empire had become one of the less savoury nursing home and step down care chains. It was formed when Neal Elliott and Andrew Turner left Hillhaven, the nursing home company spun off from NME (now Tenet Healthcare). This was shortly before the massive fraud scandal engulfed NME in 1991. Nurses dubbed Hillhaven as "Unsafe Haven". Both Turner and Elliott developed their business skills under NME's chairman Richard Eamer. Turner soon left Horizon to form Sun Healthcare. (there is some information about it here)
NME's disturbing but financially successful practices were passed to Vencor when it purchased Hillhaven in 1996. Vencor and Sun Healthcare crashed ignominiously into bankruptcy in 1999 amidst, allegations of Medicare fraud and the misuse of patients.
The company copies Columbia/HCA, entering the managed care market by buying MedSolutions. It becomes both a payer and a provider of health services.
By the end of the year MedPartners is in trouble, it is claimed because of too rapid growth and lack of income to support it. A bid to sell to Phycor for $8 billion falls through amidst a scandal about disclosure and one report suggests security fraud. House resigns and Scrushy becomes chairman temporarily. MedPartners buys Talbert Medical Management for US $200 million.
At the end of 1997 Aaron Beam, a co-founder who has been Chief Financial Officer since 1984 is replaced as CFO by Michael D Martin who has been Treasurer. He continues the fraudulent accounting.
HealthSouth buys Cedar Court HealthSouth Rehabilitation Hospital in Melbourne, Australia from Krinsky Pty Ltd but does not expand further.
Scrushy and two other HealthSouth directors are also on the board of Integrated Health Services (HIS). Directors are also shared with MedPartners and Capstone. At least two senior HealthSouth staff are from their auditors Ernst & Young including William T Owens.
The heady confidence and self-glorification characteristic of the corporate chains and their leaders at this time is reflected in Scrushy and HealthSouth's philanthropy and self-glorification.
The company builds the Scrushy/HealthSouth sports Medicine and Sports Science Centre for the Olympic Committee, a corporate museum, and a US $38 million headquarters including the Richard M. Scrushy Conference Centre.
In Birmingham the university and many
charity's are deeply indebted to Scrushy. Halls, football stadiums
and institutions are named after him. He holds positions in the
community. Photographs and statues are everywhere and he is looked on
as a potential politician.
Scrushy reorganises the imploding MedPartners management in January and takes over as chairman until November but he remains on the board after this. MedPartners has refused to address demands made by insurers alleging Caremark had defrauded them. Twenty-three insurers go to court claiming a US $3.3 billion fraud by Caremark. The contribution of this action to MedPartners collapse is not known. I have not seen further reports but the case seems to have become irrelevant in MedPartner's implosion.
The Physician Management business collapses and a decision is made by MedPartners to abandon it. Shares have plummeted and investors have lost many millions. Crawford a turn around specialist who has been brought into HealthSouth becomes chairman. MedPartners switches direction to its Caremark pharmaceutical business.
HealthSouth buys 34 of Columbia/HCA's surgery centres for US $550 in cash - a high price. It wanted the other 114 too.
Acquires National Surgery Centers for $590 million in stock. NSC operates 40 ambulatory surgery centres.
Discloses in HealthSouth SEC report that it inherited a series of legal problems from Horizon/CMS. These included an investigation by the SEC, one by the New York Stock Exchange, an investigation of a facility by the Attorney General of the State of Michigan that was followed by criminal proceedings, multiple shareholder class actions, Medicare fraud investigations in Louisiana, and a jury award of US $92 million for a patient care issue.
The new Medicare funding arrangements designed to prevent exploitation of the system are commenced mid 1998. By the end of the year profits have dropped 93% but Scrushy blames managed care contracts for this. Scrushy remains supremely confident while selling shares. He then announces that the promised expectations will not be met. Share prices fall and a number of class actions are commenced by angry stockholders alleging insider trading. It will later be suggested that this downgrade was artificial and an attempt to hide some of the fraud.
The company plans to do business as usual, Scrushy said, continuing to open facilities at the rate of about one a day.
"HealthSouth has been the cheapest game in town," said Jean Swenson, Boston-based analyst for BT Alex. Brown. "But the profit profile for HMOs overall seems more dismal than in the past," and HealthSouth may be forced to accept lower-paying contracts, she said.
Nancy Adams-Henroid, a Chicago-based manager in Arthur Andersen's healthcare consulting practice, said that if diversification was a HealthSouth strategy, it wasn't paying off. "With PPS, they are going to be impacted in the ambulatory surgery arena as well as the long-term-care arena."
Although the company has not pointed the finger at Medicare payment policies for affecting its earnings, other rehabilitation providers have pointed fingers.
HEALTHSOUTH STUMBLES: STOCK FALLS ON REPORT OF LOWER-THAN-EXPECTED EARNINGS Modern Healthcare Oct. 12, 1998
Home care is no longer profitable under the
new Medicare payment system. Like other corporations HealthSouth
closes its Home Care unit claiming that it has made other
arrangements for these patients. Many patients once cared for at
homes end in nursing homes. This is another example of the way in
which the lives and day to day care of frail citizens is hostage to
the market. Decisions affecting their care are not made at the
bedside or based on need, but in boardrooms based on profit.
Cracks begin to appear in HealthSouth's invincible image. The first major indications of Medicare fraud and skimping on patient care appear.
A past employee opened a web site accusing the company of Medicare fraud. It alleged Scrushy was a crook. Scrushy responded by filing a defamation lawsuit.
G. G. Enterprises, a Scrushy family business is charged with fraud allegations claiming that it overcharged Medicare for the computers it had sold to HealthSouth starting in 1989. In 1996 it bought US $13 million worth of equipment. Without admitting or denying wrongdoing, HealthSouth settled by paying a US $7.9 million fine.
A Medicare-authorised investigation by Alabama Blue Cross finds that HealthSouth improperly billed Medicare for therapy by students, interns, athletic trainers and other unlicensed aides.
Whistle Blower suit commenced in Texas accusing HealthSouth of widespread abuse of Medicare. The company is accused of billing for services it never provided, delivering poor care, treating patients without a formal plan of care and using unlicensed therapists. HealthSouth also routinely billed Medicare for individual therapy when people were being treated in groups; a practice Mr. Scrushy later went to lengths to defend
HealthSouth buys back $1 billion in stock and takes $300 million charge closing a number of businesses and hospitals which are not profitable
MedPartners loses $1.26 billion and closes its physician management business but keeps Caremark, a pharmacy benefit manager. It sells Caremark's international home care businesses in Europe, Japan and Canada to a German company Fresenius AG. MedPartners changes its name in the USA to Caremark. Some HealthSouth directors including Scrushy remain
MedPartners' Californian physician operations are pushed into bankruptcy by the state government. The business is rapidly transferred into the hands of a persuasive orthopedic surgeon of dubious probity and business skill. The business soon goes from bad to worse. The company shuts down multiple facilities and then enters liquidation. Doctors, patients and their treatment are seriously inconvenienced and compromised during the process. This culminates in a disastrous hiatus in services.
HealthSouth is accused of breaking Rode Island's strict laws controlling for profit ownership. It denies this claiming to be a "good corporate citizen not involved in any of the scandals dogging the industry.
HealthSouth states that earnings remain flat and announces plan to split the company into inpatient and outpatient companies. This may be a first attempt to bury the fraud but it is not followed through.
Outpatient reshuffling. Birmingham, Ala.-based HealthSouth Corp. continues to tower over other providers of outpatient care, with a total of 1,549 sites, excluding its 125 rehabilitation hospitals.
Portrait of an industry in turmoil; Survey paints picture of doom and gloom for many post-acute-care companies, Modern Healthcare December 20, 1999
HealthSouth buys Mariner's "Rehability"
outpatient rehabilitation facilities for a modest US $55 million, a
far cry from the billion dollar efforts of a year ago.
Fraud prone Integrated Health Services (IHS) about which there are many allegations of poor care enters bankruptcy under a fraud tinged cloud. HealthSouth has close links and several staff including Scrushy have been directors.
Benjamin Lorello and Geoffrey Harris move to UBS Warburg where Harris continues to give positive assessments of HealthSouth and HealthSouth switches its business
HealthSouth pays Alaska US$1 million for Medicare fraud, much of which occurred, before HealthSouth bought its previous owner but HealthSouth continued the practices.
While HealthSouth's reported profits remained flat analysts were positive about its prospects and its share price rose again.
A strong surge for HealthSouth Corp.'s stock was just what the doctor ordered.
HealthSouth's shares jumped 30 percent last week to $10.56, marking the first time the stock has moved out of the single digits since August 1999.
HEALTHSOUTH SHARES SURGE IN HEAVY TRADING Birmingham News (Alabama) October 8, 2000
Caremark's share price has recovered since
its name change from suspect MedPartners to Caremark. Scrushy sells
Source Medical Solutions and MedCenterDirect.com are two more companies spun off from HealthSouth around this time. They also later became financial problems.
A survey by Modern Healthcare examined the widespread failures and losses in large health care groups found that HealthSouth was one of a few exceptions to the general trend.
Scrushy is indignant about a threat by Moody's Investors Service to downgrade HealthSouth's US $3 billion debt saying "We're doing great, . . . Our cash is great, our earnings are strong . . . and shareholder value is improving every day". The accounting fraud is continuing and the company is perhaps trapped by its commitment to grow, and the envy of the marketplace, which it dare not disappoint.
If the first are to be last and the meek are to inherit the earth, the post-acute-care industry may be ahead of its time.
Of 63 respondents providing financial data for both years, the biggest companies were the least likely to post year-to-year improvements in net income. They were also the most likely to report a bottom-line loss.
That generalization comes with a major exception: industry leader HealthSouth Corp.
The Birmingham, Ala.-based outpatient surgery and rehabilitation provider, with $4 billion in revenue and $76.5 million in earnings in 1999, was one of a handful of respondents that posted solid year-to-year growth.
Bigger isn't better; Our first Post-Acute-Care Survey finds that larger firms are faring worst in turbulent industry, Modern Healthcare July 24, 2000
The many corporate failures have forced the government to restore some Medicare funding and the prospects looked better. HealthSouth starts raising money from the market in order to pay down debt.
HealthSouth pays US $8.2 million Medicare fraud for illegally billing Medicare for equipment purchased from a company owned by Scrushy's parents. Government joins a separate whistle blower Qui Tam action alleging Medicare fraud.
Scrushy resigns as a director of Caremark.
Scrushy is listed in the 100 most powerful in health care together with the other owners of large health care chains.
During 2002 things begin to rapidly unravel and HealthSouth finds itself on a slippery slide with serious problems.
- - - U.S. Department of Justice served the company with a complaint in connection with a pending civil suit - - - - connected with a previously disclosed civil False Claims Act case pending against the company in - - - Texas.
The complaint alleges that HealthSouth submitted false claims for reimbursements from Medicare and other federal health-care programs.
DOJ Serves HealthSouth A Complaint www.cbsmarketwatch.com- May28, 2002
In May the Justice department joins a whistle
blower initiated action accusing HealthSouth of seeking individual
payment for services given to groups and provided by unlicensed
employees including interns and students. This means that the
government takes over the case, investigates and prosecutes. The
government seldom joins these suits unless it is confident of a large
Scrushy seems to see the writing on the wall. He exercises 5.3 million options at $3.78 and sells them for US $14.05 the same day. Altogether he sells US $1.3 million in stock in May and July.
July 31, 2002 :Scrushy sells 2.5 million shares of stock back to HealthSouth at $10.06 a share, netting more than $25 million.
Aug. 14, 2002 :Scrushy certifies under oath that the company's financial statements contain "no untrue statement of material fact."
Aug. 27, 2002 :Scrushy announces an earnings restatement, saying that changes in Medicare rules will cause a hit of about $175 million in 2003.
Chronology of HealthSouth Developments New York Times November 5, 2003
In August the company announces a profit downgrade blaming minor changes to Medicare regulations which it has known about for a long time but which they claim they have only recently become aware of. Many companies have been prosecuted in the past for charging group care as individual therapy.
It will later be alleged that this downgrade was inflated in another attempt to hide the missing money in the accounts.
HealthSouth, the nation's biggest chain of rehabilitation hospitals, surprised investors yesterday by withdrawing its 2002 profit estimate and offering an explanation that some analysts said was incomplete.
It said a new Medicare payment limit on outpatient rehabilitation charges could reduce its pretax profit before interest, depreciation, and amortization by $175 million a year, about 13 percent of its projected $1.3 billion of annual pretax earnings.
HealthSouth shares plunged $5.26, or 44 percent, to $6.71, on the New York Stock Exchange, down 63 percent from a high of $18.30 last September.
HealthSouth, based in Birmingham, Ala., also announced that it was reviving plans to spin off its surgery centers operation, its most lucrative unit, later this year.
He said the company was urging Medicare to change the rule, which Medicare officials said limited rehabilitation payments to a group rate -- rather than paying for each individual -- when two or more patients received therapy together, directed by a single therapist.
Mr. Scrushy, 50, who founded HealthSouth in 1984, said he was stepping down as chief executive to become the chief of the independent surgery company. He will remain chairman of HealthSouth.
Deborah J. Lawson, a health care analyst at Salomon Smith Barney, said she was "absolutely shocked" at the size and effect on profits of the Medicare reimbursement change, "as well as the company's decision to cease providing analysts with earnings guidance."
Tom Scully, head of the federal Centers for Medicare and Medicaid, said he was "just amazed" that HealthSouth had not brought the matter directly to him." - - - - - - - - - There's got to be some business reason behind it," he said. "This is a pretty minor regulatory ruling."
HealthSouth Pulls Back Its Forecast, But Wall St. Questions Explanation The New York Times August 28, 2002
Mr. Scrushy latched onto the Medicare rule and the estimated profit decline, regulators say, as a way of accomplishing that aim. HealthSouth claimed that the rule would reduce earnings as much as $175 million and make it impossible for it to estimate its earnings for 2002 or 2003, despite internal calculations that the hit was only $20 million to $30 million a year, the regulators said.
HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 22 2003
This explanation is not plausible and in the
Post-Enron environment is not accepted. The share price tumbles and a
host of class actions alleging insider trading are commenced.
In August Scrushy steps down as chief executive but remains as chairman. He announces plans to split off profitable surgery centres as a separate company which he will chair. A witness will later indicate that he planned to take the rump private and bury the fraud there. The plan to do this is worked out by Benjamin Lorello from UBS Warburg. He regularly attended HealthSouth board meetings to advise them.
HealthSouth was rocked last August when it announced that a Medicare billing change would hurt its earnings significantly. That sent its stock price plummeting and led to lawsuits claiming in part that Scrushy knew of the Medicare change's impact when he sold half his stake in the company, or some $25 million in stock, a few weeks before the public announcement
Alabama-based HealthSouth accused in $1.4 billion fraud, Associated Press 20 Mar 2003
Mr. Scrushy had cashed in $74 million of stock options in May and repaid a $25 million company loan with stock in late July. He asserted that he was unaware of the problem concerning the Medicare rule change until mid-August - but the events captured the attention of federal regulators and securities lawyers. By September, the company was being investigated by the S.E.C.
HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 22 2003
The HealthSouth corporate facade begins to
break up as post-Enron investors and analysts start to look
critically at its quality of services with claims that care was
provided by unqualified staff. The Office of the Inspector General of
the Department of Health and Human Services, which investigates
Medicare and Medicaid fraud, confirmed that it was looking at
There are also allegations about its financial practices, insider stock sales, business dealings among company officials and the independence of the board. It has a credibility problem and shares tumble. The company claims it is committed to transparency.
Press reports indicate that billing issues and questions about the company's quality of care have dogged HealthSouth for years.
HealthSouth officials are doing a lot of explaining these days. Among them are issues related to Medicare billing practices that caused its stock price to tumble over the last few weeks and a lawsuit filed by the Justice Department against HealthSouth last May accusing it of seeking payment for services by unlicensed therapists. The company has also disclosed in proxy statements and other filings over the years the outlines of a number of insider deals.
Growing Concerns on the Health of HealthSouth, New York Times September 19, 2002
The Securities and Exchange Commission is seeking a broad range of documents from HealthSouth Corp. as it investigates accounting issues and stock trading related to announcements that sent the company's shares off a cliff in August, Friday's Wall Street Journal reported.
SEC Requests Broad Range of HealthSouth Documents In Accounting Probe The Wall Street Journal - Sept. 20, 2002
Details of Scrushy's US $10.5 million
(including bonus) 2001 remuneration and his lavish philanthropy are
reported in the press.
The SEC starts an investigation of the share sales made in July 2002 shortly before the stock collapsed, by Scrushy and Owens.
A host of shareholder class actions accuse Scrushy and others of not disclosing adverse information about the stock's potential decline in 1998 and again in 2002 when they sold stock. The SEC will later claim that these projected losses were deliberately overstated to hide the fraud.
Wolf Popper LLP has filed a securities fraud class action complaint against HealthSouth Corp. ("HealthSouth") (NYSE: HRC) and three of its senior officers on behalf of purchasers of HealthSouth common stock from January 14, 2002 through August 27, 2002, inclusive.
WOLF POPPER CHARGES HEALTHSOUTH WITH SECURITIES FRAUD, http://www.wolfpopper.com/ NEW YORK - SEPTEMBER 6, 2002
Scrushy and Owens deny insider trading.
HealthSouth announces that an independent national law firm has
cleared Scrushy's sale of shares. HealthSouth employed the firm and
its report was never made public.
Press reports indicate that billing issues and questions about the company's quality of care have dogged HealthSouth for years.
In October HealthSouth abandons plans to split the company in the face of criticism by investors and lenders. It starts looking for things to sell.
Just months before an accounting scandal engulfed HealthSouth Corp., top company executives launched an endgame that might have prevented an alleged $2.5 billion fraud from ever being discovered, according to testimony in a federal court hearing in Birmingham, Ala.
Ms. Coleman said Mr. Smith, who has since pleaded guilty to fraud charges related to the accounting case and is cooperating with prosecutors, told a room of six people that the management buyout and a plan to sell HealthSouth's diagnostic division would soon be announced.
HealthSouth Corp. Planned Buyout, The Wall Street Journal April 25, 2003
"As we have said before, we do not believe that HealthSouth or anyone associated with HealthSouth has done anything wrong. We have cooperated with all requests for information from government authorities, and we will continue to do so," Scrushy said in a company statement.
HealthSouth Gets U.S. Atty's Subpoena For Papers Reuters - FEB 6, 2003
The end for HealthSouth and Scrushy comes
rapidly. Post Enron investigators target HealthSouth and in February
it is served with a subpoena as part of an investigation into
criminal practices. Regulators examine documents and interview many
HealthSouth employees. The family of accountants who it is alleged
carried out the accounting fraud start meeting daily or more
Weston L. Smith, a former chief financial officer approaches prosecutors and offers to make audiotapes of his colleagues. It is likely that this is the key to the multiple guilty pleas that follow.
HealthSouth Corp., hampered by big restructuring charges and stock-trading investigations, swung to a fourth-quarter net loss of $406 million, or $1.03 cents per share, from a year-earlier profit.
Revenue fell 17%, to $923.5 million from $1.12 billion a year ago, as the big Birmingham, Ala., health-care company closed facilities and treated fewer patients at its outpatient rehabilitation and diagnostic clinics.
HealthSouth Swings to Loss On Restructuring Charges Wall Street Journal - MARCH 4, 2003
The company's current CFO William Owens also
cooperates with investigators and tape records incriminating
conversations with Scrushy. The next day FBI agents raid HealthSouth
In a civil action the SEC and the Justice department charge the company and Scrushy with a massive fraud between 1999 and 2003. HealthSouth had overstated its earnings by US $1.4 billion and its assets by US $800 million. Authorities indicate that the fraud started as long ago as 1986 when the company went public. Weston Smith, Chief Financial Officer (CFO) pleads guilty and is helping authorities. The authorities obtain a court order to freeze Scrushy's assets and bar him from acting as a director of any company.
HealthSouth's shares are suspended on the stock exchange and subsequently removed. It is removed from the S&P 500 index. The share price has already fallen from $30 five years ago to $4. It is soon trading for as little as 14 cents over the counter. The banks freeze the company's US 1.25 billion credit line ahead of a US $345 bond payment due April 1st. The company struggles to avoid bankruptcy. It admits that its accounts cannot be relied on as an indication of its financial position. It is unable to file its annual report with the SEC and postpones its annual meeting.
But one lender admitted it was "a close call" as to whether the banks would be willing to make a loan without the company's first filing for bankruptcy.
HealthSouth Scrambles for Financing to Avert Bankruptcy, New York Times March 22, 2003
Scrushy and William Owens current chief financial officer are put on administrative leave. Soon after Owens too pleads guilty to criminal fraud and is assisting investigators. Other accountants see the writing on the wall and rush to strike deals.
Senior officials - - - - scrambled over the weekend to offer evidence and strike deals with federal prosecutors, people involved in the investigation said.
HealthSouth Officials Seek to Cut Deals With the U.S. The New York Times March 22 2003
By the end of the month Emery Harris, a vice
president of the company also rolls over and agrees to assist
investigators. HealthSouth adopts a policy of firing each executive
starting with Owens, as they plead guilty to criminal conduct. The
SEC also files civil charges of accounting fraud and insider trading
against the three who have pleaded guilty to criminal charges.
HealthSouth cannot fire Scrushy as a director but they ask him to resign, suspend him as chief executive officer, and fire him as chairman, notifying him that his contract is "null and void".
HealthSouth forms its own committee to investigate the allegations. The press begins to look at Scrushy's lavish lifestyle, his extracurricular activities, his philanthropy and his aggressive management style.
The effectiveness and frequency of meetings of HealthSouth's audit committee is challenged. The committee denies knowledge of the fraud and employs lawyers to protect it.
In an attempt to restore credibility the company had appointed a new director, Betsy Adams and made her head of the committee to investigate the SEC allegations of fraud. She resigns after less than 3 weeks.
To restore credibility the company is looking for new directors not tainted with the Scrushy brush. One report indicates that the board is deadlocked 4 to 4 as directors with longstanding ties to Mr. Scrushy refused to approve a plan to add independent members who would form a majority. - - - - The holdouts, according to these sources, included three investors, George H. Strong, C. Sage Givens, Charles W. Newhall III and Larry D. Striplin Jr. a friend of Mr. Scrushy with business ties to the company.
There is skepticism abut the role played by the auditors given the duration of the fraud. Some believe that there were pointers to what was happening - which should have aroused suspicion. This impression is reinforced when HealthSouth fires Ernst and Young and employs new auditors.
Scrushy's maze of private companies, the complex relationships between them and the businesses run by HealthSouth come under scrutiny. The FBI looks to see if Scrushy has established an off shore tax haven.
There are concerns that the company has committed Medicare fraud by huge and artificial increases in the company's assets, which were then included in claims for depreciation allowances from Medicare. This is the same sort of fraud as that perpetrated by Columbia/HCA in its US $1.7 million fraud settlement.
Quite separate to this the Department of Health and Human Services' inspector general's office reveals that Medicare inspectors have been investigating HealthSouth for Medicaid fraud "on a few fronts" for several years.
Insurance companies start examining their contracts to see their exposure to HealthSouth and determine if they have been defrauded. Private investors commence class actions against Scrushy and the company.
Suppliers to the hospitals wonder if they will be paid. Insurers ponder if they should send patients elsewhere. Government officials continue to investigate.
HealthSouth's Chart: Guarded but Clearly Unstable, New York Times March 22, 2003
Information is sent to Australian Authorities in Victoria documenting what is happening in the USA. All press reports are forwarded to the authorities in Victoria in digital form as they become available in the USA. This continues through to 2006 when the Melbourne hospital is sold.
A long line of current employees and past employees are pleading guilty to the fraud and queue up to give evidence in return for reduced sentences. By the end of April a total of 11 senior past and present staff plead guilty to fraud including all 5 of the company's past Chief Financial Officers (CFO's). The fraud is clearly documented back at least to 1997. New pleas include Michael Martin, who describes discussions with Scrushy about fraud in 1993 and Aaron Beam a co-founder of the company and the first CFO of HealthSouth.
The evidence some give exposes over US $1 billion additional fraud in 1997 and 1998 bringing the total to US $2.5 billion. They reveal that HealthSouth misstated assets of companies it acquired to create "sock" reserve accounts which were then "bled out" into HealthSouth to falsely enhance its own earnings.
Those who pleaded guilty describe how they were sucked into the fraud, often unaware of what they were doing or the extent until they were trapped by their own guilt. There was fear and intimidation and they risked losing their jobs. No one is disputing the nature of the fraud or its extent.
HealthSouth admitted last month that its past financial reports could not be relied upon. On Tuesday, it informed the Securities and Exchange Commission it would be unable to file its annual financial statement for 2002 by the March 31 deadline.
HealthSouth fails to file annual report to SEC Modern Healthcare's Daily Dose April 3, 2003
The SEC anticipated that Scrushy would be
required to pay back over US $700 million but his assets were only US
$150 million. They thought that he might move his funds into offshore
accounts and sought a court order freezing his assets. Defrauded
shareholders would not be able to recover even a fraction of their
losses. The FBI and Department of Justice, who had a lawyer present,
cooperated with the SEC in this. They were following federal
government directives and new laws aimed at freezing the profits of
fraud so that those defrauded could recover some of their losses.
Scrushy challenges the SEC's application to continue to freeze his assets and a long mini-trial takes place. Scrushy defends himself bringing character witnesses and witnesses who claimed he did not know of the fraud. He claims that he was not hands on in his management style and was deceived by others.
The prosecution discloses limited information because of the planned criminal prosecution. Those who have rolled over use the 5th amendment to remain silent as their agreement is with the US department of Justice and state authorities can still prosecute them. Parts of Owen's tape recordings are played in court. Gordon, HealthSouth's current chairman testifies that Scrushy was "closely involved in all facets of the company".
Scrushy's current personal accountant gives evidence about Scrushy's web of private companies and the suicide of her predecessor, a matter that is still being investigated.
Scrushy continues to deny the allegations claiming that he was ignorant of the fraud and is the subject of government victimisation. He claims that Owens is framing him.
An assistant vice president for finance, Kelly Coleman, testifies that she heard in a meeting "last summer" that Scrushy had backed a plan to end the fraud by engineering a corporate spin off, selling assets, and blaming a Medicare reimbursement change. Afterward she said the rest of the company would be private.
The judge was scathing about the prosecutions attempt to mix a civil case and an as yet unlodged criminal case to freeze assets. She considered Scrushy's rights were being breached as he was being denied the opportunity to cross-examine his accusers. She unfreezes the assets and also puts the civil case on hold until the criminal investigation and case has been resolved.
The SEC continues its attempts to freeze Scrushy's assets.
But in letters to Scrushy's defense lawyers this week, Martin hasn't been so shy. She has advised Scrushy's legal team that she is prepared to resort to RICO laws -- usually used in drug and mob cases -- to seize Scrushy's assets.
Scrushy's lawyers' charges fall on deaf ears : One accused FBI of eavesdropping USA TODAY May 16, 2003
The web of inappropriate relationships
between HealthSouth, Scrushy, Scrushy's closely associated directors
and a web of companies in which they were all involved begins to
unfold. A report in the New York Times examines the conflicting
situation of an Investor and close associate of Scrushy, Ms Givens
who is a long-term director and also on HealthSouth's audit
committee, the body that is charged with monitoring corporate
practices. HealthSouth struggles to find new independent directors
but there are few applicants.
HealthSouth starts to lay off staff at its headquarters in order to reduce costs. It plans to sell hospitals. It seeks to minimise the damage by promoting the integrity of its new Chairman and by issuing new governance guidelines.
Meanwhile, company officials announced today they will eliminate about 165 nonclinical positions at the corporate headquarters, or about 20% of the workers at that location.
HealthSouth pleas, layoffs announced Modern Healthcare's Daily Dose April 3, 2003
It takes steps to reassure the doctors on
whose support it depends, paying them promptly and also paying their
insurance. The nature of HealthSouth's financial dealings with
doctors is not revealed but it is clear that they co-own facilities
and that HealthSouth has extensive financial dealings with them. 3500
doctors have invested in surgical centres. HealthSouth makes
partnership payments and pays for doctors insurance. The doctor's
support is critical for the company.
The exposure of these financial relationships with doctors raises concerns about conflicts between the doctors' financial dependence on the company and their duty to their patients. Exploitation of this financial vulnerability was one of the keys to the success of corporations like Tenet/NME, Columbia/HCA and a number of others. There was extensive fraud and large numbers of patients suffered as a consequence. Much of this could not have occurred without the compliance of doctors. The line between what corporations consider legitimate business relationships and kickbacks is so thin that for practical purposes it does not exist.
The case against Scrushy and HealthSouth builds rapidly and analysts confidently predict that Scrushy will soon face criminal charges. Under the new Sarbanes-Oxley corporate reform law he would be looking at 10 years behind bars.
The SEC launches an insider trading action against Scrushy looking for US $743 million including the return of profits, civil penalty and interest. The SEC claims that Scrushy sold at least 13.8 million shares of HealthSouth stock worth more than $170 million since 1991 based upon his knowledge of the company's true results.
Richard Scrushy, ousted this week as chairman and CEO of HealthSouth Corp., has been charged with insider trading. - - - - - The Securities and Exchange Commission charged Scrushy on Thursday with unfairly profiting from $170 million in stock sales going back to 1991.
Former HealthSouth CEO charged with insider trading The Associated Press April 4, 2003
More information emerges about Scrushy's
lavish life style, his private businesses and his autocratic style of
control. His Monday morning "beatings" were dreaded by employees whom
he would grill and criticise, humiliating them publicly. Those who
give evidence indicate that they would have been dismissed had they
not gone along with company practices. A past employee describes how
he was dismissed in 1989 after he questioned accounting.
Scrushy obtained his objectives by intimidation and heaped contempt on his critics. He is alleged to have created an elaborate facade by manipulating those around him. It was "like a cult" and those around Scrushy were "excessively obedient and eager to please".
Employees in the hospitals have claimed that "security officers appeared to closely monitor the activities of employees and others". Reporters describe the tight control Scrushy exerted over the media. He insisted on being present at meetings with the media and answered the questions himself.
Employees commence a class action claiming the alleged fraud made company stock a poor investment for their retirement plan. More stockholder class actions are lodged. Retirement funds which purchased HealthSouth bonds are also suing.
Also on Monday, five HealthSouth employees filed a lawsuit against the company, claiming the alleged fraud made company stock a poor investment for their retirement plan.
HealthSouth probe reaches back to corporate founding Nando Media and Associated Press April 7, 2003
General contractor Brasfield & Gorrie has sued HealthSouth Corp. for $22 million for its work on the company's unfinished hospital on U.S. 280.
Contractor sues HealthSouth over unfinished hospital
The Associated Press April 20, 2003
An Alabama retirement fund on Tuesday said it plans to file a lawsuit against HealthSouth Corp. HLSH.PK , claiming it lost more than $18 million on bond investments because of an accounting scandal at the embattled company.
Alabama fund to sue HealthSouth over bond losses Reuters April 22, 2003
HealthSouth's creditors did agree to give it
to 1st May to pay them. Workers on some building projects
downed tools. Other projects were discontinued and builders came
looking for their money, some taking to the courts suing for unpaid
LANDON THOMAS Jr., a reporter writing for the New York Times examines the role which persistent positive reports by Geoff E Harris a market analyst working for Smith Barney and later for USB Warburg played in HealthSouth's success by boosting its stock value. During this time Smith Barney did US $8 billion in business with HealthSouth, a clear conflict of interest for Harris. During this period Harris' salary rose from US $4 million a year to US $20 million, a reflection of the business his reports brought in. These reports and the value of its stock would have facilitated HealthSouth's takeovers, its ability to raise loans from banks and to raise money on the stock market.
It is clear that similar practices were system wide in the investment banking industry. A massive fraud investigation into similar bullish reports in order to generate business by analysts linked to large finance groups has recently resulted in US $1.4 billion in fraud settlements and stringent new regulations which aim to curb these practices.
The SEC and the press continue to explore the worrying relationship between directors, Scrushy, HealthSouth and a number of companies in which they are involved-companies, which reaped rich rewards for Scrushy and colleagues. These include Capstone Capital Corporation, a publicly listed real estate investment company founded by Scrushy and partners. It purchased and then leased back facilities from HealthSouth, Integrated Health Services (IHS) and other companies of which Scrushy was a director. This was one of the deals in which Smith Barney was implicated.
An April 20 review by the New York Times indicated that over the years, as HealthSouth prospered, the company was repeatedly accused of cheating taxpayers and cutting corners. In other reports a past hospital staff member describe how the hospital executives were instructed by HealthSouth to accept Medicare patients even though they were too ill for the resources of the facilities. As in Tenet/NME they understood that "if they did not keep the numbers up, they would lose their jobs". HealthSouth's response to accusations that it admitted inappropriately was to commence a defamation action.
A former HealthSouth executive and co-founder, Aaron Beam's prophetic 1996 statement about meeting 26 year old Scrushy in 1984 is reported. "I went home and told my wife that I just interviewed with the biggest con artist I ever met, or the most brilliant young man I ever met," he told The Birmingham News in 1996. "Either way," he said, "I was taking the job because he was really, really good at what he did." Beam was HealthSouth's first CFO.
On 24th April Beam becomes the 11th person and the last of the five CFO's to plead guilty to fraud. Because the 5-year limitation is exceeded he is charged only with bank fraud. He is accused of devising a scheme to obtain loans and credit from Birmingham-based AmSouth Bank and other lenders by filing false and fraudulent financial information with the bank. The charge carries a maximum penalty of 30 years in jail.
Federal investigators commence an investigation of HealthSouth's tax firm, KPMG.
Federal investigators are scrutinizing HealthSouth Corp's. HSLH.PK operating units and asking questions about the work of its tax firm, KPMG [KPMG.UL] as they expand their probe into accounting fraud at the firm, The Wall Street Journal reported on Monday.
HealthSouth probe expands, KPMG role scrutinized-WSJ Reuters April 28, 2003
A series of reports at the end of the month indicate that HealthSouth plans an orderly entry into bankruptcy and has already negotiated this. Others claim it can still avoid this. HealthSouth's lenders refuse to extend their agreement not to insist on payment beyond May 1st but HealthSouth does not expect them to do so.
Still, high payouts from lawsuits against the company could tip HealthSouth into bankruptcy. The Securities and Exchange Commission is seeking up to $743 million in penalties, forfeiture of illegal profits and triple damages. It accuses the company and former CEO Richard Scrushy of insider trading and fraud. '
Now healthcare has its Enron' : HealthSouth's physician partners face some difficult choices as investigators continue to expose the company's finances :: Suits pile up Modern Physician May 1, 2003
Analysts were predicting inevitable bankruptcy. Faced with demoralised staff, a decimated leadership and a disoriented board the remaining board had the insight to go looking for help. They employed Credit Suisse First Boston for advice, turnaround specialists Alvarez & Marsal to run the business, and Skadden lawyers to manage the legal minefields. PricewaterhouseCooper were employed to carry out a forensic review of its financial statements.
None of this would have come cheaply to a company rushing to bankruptcy but it was inspired decision making. These experts were not only skilled but very credible and credibility is what HealthSouth now lacked. The board followed their advice slavishly. The company could not pay its debts and its survival depended on the grace of a number of debtors and agencies that could push it into bankruptcy.
The forensic review of the accounts will be a long and tedious process. Until it is done the company cannot issue accurate revised accounts for the years since the fraud started and until it did so it could not hold a shareholders meeting or formally elect board members.
The Federal Congressional House Energy and Commerce Committee launches an investigation into the financial fraud at HealthSouth, asking the company and its auditor, Ernst & Young, to provide detailed documentation of their actions surrounding the hospital chain's $2.5 billion overstatement of earnings. It wants to know why Ernst and Young failed to detect the fraud when there were several clues, even after they had been tipped off about fraud and told where to look.
The Committee in Washington also demands and receives additional documents as it looks at HealthSouth's relationship with its investment bankers and their analysts, as well as its tax consultants KPMG. This is the committee that investigated the Enron scandal and cross-examined key Enron staff. It also examined the conduct of investment bankers and analysts in the Enron and Worldcom failures, an investigation that resulted in US $1.4 million fines and new laws regulating the industry. It specifically wants to cross-examine Mr Lorello.
Among other things the committee is looking at Medicare fraud.
Congressional investigators are to examine the role of a prominent Wall Street banker's dealings with HealthSouth, the beleaguered healthcare company.
Benjamin Lorello, who was at Citigroup before he joined UBS Warburg, had close ties to HealthSouth and to Richard Scrushy, - - - .
Congress examines banker's role in HealthSouth The Financial Times Wed May 7, 2003
Additionally, the congressmen (House Energy and Commerce Committee) write that "it appears that HealthSouth may have submitted hundreds of thousands of claims for reimbursement to Medicare and Medicaid based on improper billing of certain rehabilitative therapy claims." The missive cites in particular contentions that the company: billed for services not rendered, billed for therapy provided by supportive personnel as if it had been furnished by licensed therapists, failed to include physicians' plans of care when appropriate and billed improperly for group therapy.
Rehab Giant Faces Congressional Probe Medical Newswire April 28, 2003
An interesting twist emerges when it is
discovered that Enron, Worldcom, HealthSouth and others that had
overstated profits and paid tax on these overstatements had already
claimed a tax refund or else planned to do so. Politicians and others
were angered and urged prosecutors to ensure that any tax moneys
refunded be added to any fines.
Reports indicate that the FBI is currently overwhelmed by vast numbers of fraud investigations. It looks very much as if the sort of things which have been detected across the health care marketplace over the last 12 years were a pointer to what was happening in the wider US marketplace, and also perhaps in Australia.
The FBI is opening three to five investigations a month of suspected fraud of $100 million or more by executives at publicly traded companies, a pace that indicates the scandals that have rocked corporate America for the past 18 months show no signs of abating.
The FBI is actively involved in about 100 cases of suspected fraud at companies, about 10 times the caseload before the alleged fraud at Enron Corp. erupted into public view in late 2001. ''This is way beyond what we've ever experienced,'' Slotter said.
Including the FBI cases, the US Department of Justice said it is conducting about 200 ongoing investigations under the aegis of its Corporate Fraud Task Force, up from 130 a few months ago
The number of new cases being pursued by investigators and regulators dashes the hopes of officials and ordinary investors that Wall Street's recent spate of scandals would fade into memory. - - - The FBI's Slotter said - - - ''But now it's turning out not to be such an anomaly.'' ''We're learning this is more commonplace than the average person thought.''
The HealthSouth case in particular has unfolded with lightning speed since US prosecutors and securities regulators brought charges in March.
FBI takes up heavy load of corporate fraud probes The Boston Globe May 6, 2003
It's not easy to shock investors these days. Hardened by three years of falling stock prices and regular revelations of corporate wrongdoing, they've become jaded about governance issues and accounting failures. But even this bunch has been shaken by the HealthSouth (HRC) meltdown.
Still Waiting for Corporate Reform; The lessons of Enron-esque scandals haven't sunk in yet. Just look at the eye-popping new allegations of executive-suite malfeasance BusinessWeek Online April 3, 2003
Scrushy's offers to testify before the congressional hearing on condition that he receives immunity from prosecution. This is rejected and the committee insists he turns over documents in his possession.
By this time HealthSouth had successfully retained its referral sources, its doctors and its therapists. It had sold off assets and reduced costs. Its income stream had been maintained and its financiers were being accommodating. The threat of bankruptcy was receding. In this it differed markedly from Tenet in 2003 - principally because Tenet had continued to deceive itself and was unable to act as decisively. Although there was dissent on the board, HealthSouth, at an early stage, brought in outside opinion and accepted it - then quite rapidly replaced its board. That it had employed outsiders to run the company made this transition easier.
HealthSouth Corp. interim Chairman Joel Gordon said on Monday the scandal-plagued health care provider has a good chance of avoiding bankruptcy as the company expects to generate over $300 million in free cash flow.
Can HealthSouth avoid bankruptcy? http://stacks.msnbc.com:80/news/936045.asp Jul 7, 2003
Estimates now put the fraud at over US $3 billion.
Prosecutors investigating bribery allegations against the governor of Alabama begin to cooperate with those investigating Scrushy.
The House Energy and Commerce panel on oversight and investigations commences a hearing into the HealthSouth scandal in which HealthSouth staff, auditors, bakers and others were interviewed. This extended through to November.
Scrushy gives a no questions barred interview to Mike Wallace on CBS News 60 minutes TV program then days later takes the 5th amendment and refuses to answer questions at the congressional hearing. He later attempted to subpoena Wallace as a witness at his trial. Scrushy employs multiple lawyers and they commence a blizzard of pretrial strategies.
Dr Helen Schilling is awarded large damages by a jury for wrongful dismissal in 2000, from her post as medical director. She claims she was fired for refusing to admit and treat patients who did not require treatment,
Criminal fraud charges are laid against Scrushy in Birmingham Alabama. Scrushy employs large numbers of high powered lawyers. They take the battle to the government making allegations about the prosecutors conduct, then seeking to have charges struck off and evidence struck out - even challenging the Sarbanes-Oxley act. They take to the airwaves and much of the case is tried in the media. This continues through to the trial in 2005.
Several of the staff who pleaded guilty and agreed to give evidence were sentenced in late 2003. Most sentences were very light and only one received a jail sentence. The judges felt that some had played a minor part. Sentences were so light that prosecutors appealed.
Meanwhile HealthSouth was sticking to its business plan and was gradually pulling itself out of its economic crisis. Staff were fired, hospitals sold or closed, and luxury jets dispensed with. There is some conflict and legal action as it tries to shirk some of its obligations. Its ambulatory surgery centres were hardest hit as the embarrassed surgeons had responded to the fraud by walking. HealthSouth accommodated them by removing its signs from the buildings.
HealthSouth's lenders allowed it to pay only the interest on its loans. Its debt was US $3.3 billion and it was able to pay US $117 million in August. It also becomes the victim of a scavenger. Its bonds were overdue for payment and the bondholders could force it into bankruptcy. A scavenger preying on distressed companies bought a majority of some bonds and commenced a court action to force bankruptcy. It was really a form of extortion to force HealthSouth to pay a much higher interest on its bonds. HealthSouth had no choice but to accept this and after some resistance negotiated a settlement 6 months later in June 2004.
A shareholder, the Teachers' Retirement System commenced a court action whose ultimate aim is to force the complete replacement of HealthSouth's board by outsiders not tainted by the past. Healthsouth soon acceded to this and set in place a process of resignations and appointments which would give it an almost new board; even though it was unable to hold a meeting to vote them in. Several key senior staff were also replaced.
The firm HealthSouth employed to restructure the company estimated that the fraud was in excess of US $4 billion - even as much as US $4.6 billion. The recovery process was working well. It was current on its debt payments. Confidence was returning. The shares which went as low as 8 cents were now trading just under $6. It negotiated a US $355 million 7 year loan. Recognising the huge role that stock options played in driving the fraud, the company stopped giving options to directors.
Early in 2004 Scrushy found (or rediscovered) fundamentalist religion and joined several black fundamentalist churches. He not only became a lay preacher but he hosted a series of religious TV programs on his family's local TV network. He became well known as a televangelist and his guests included the black preachers and Bishops from these churches. He donated t them generously.
They and their congregations became staunch supporters of Scrushy whom they experienced as a fine God fearing citizen who had been wrongly accused - a loyal servant of God. Many came to the trial to support him. It is from this community that many of the jurors would come.
It is revealed that HealthSouth and its staff bribed a Saudi Arabian official by paying an ongoing kickback in return for a contract to operate a hospital. The Australian operation was the vehicle used for this criminal act. Two now plead guilty in the USA and two elect to go to trial. They were acquitted by a jury in 2005.
Caremark purchases Advance PCS.
HealthSouth successfully renegotiates US $715 million of its debt.
I May Jay Grinney is appointed as the new president and CEO of HealthSouth. Grinney spent many years with HCA during the time when it perpetrated its US $1.7 billion fraud. He survived the fallout and assisted in dealing with government and in HCA's recovery. His lineage with a company as dysfunctional as HCA is worrying. His experience and skills in extricating a company on its knees following a scandal, and threatened by government, are considerable. HealthSouth brought in another HCA veteran as its new COO. It appointed lawyers and other experts in corporate governance to its board.
By mid 2004 Scrushy and HealthSouth were further enmeshed in the Alabama bribery investigation.
Sentencing of staff continued during 2004 and 2005 with several of the principals in the fraud convicted and given prison sentences. Sentences seemed to be rather variable depending on the particular views of the different judges about the Scrushy trial. The prosecution appealed the sentences of some of the main offenders and this dragged on into 2006.
HealthSouth reached US $325 million Medicare fraud settlement in January.
Multiple shareholder suits some commenced as early as 2002 have by now been consolidated into two class actions.
HealthSouth's forensic auditing is completed at last. In January it files revised accounts for 2000 and 2001 as well as accounts for 2002 and 2003. It needs its 2004 accounts to hold an AGM.
One of the new HealthSouth directors becomes embroiled in an accounting scandal that occurred at his previous company. He resigns from HealthSouth's board.
Caremark under Mac Crawford (previously from HealthSouth) has distanced itself from HealthSouth and becomes one of the largest and most successful Pharmacy Benefit Managers. Crawford receives accolades and awards from the industry as well as massive bonuses. Drug company critics are very critical of its conduct.
This is even though Caremark and a number of other prescription benefit companies including AdvancePCS are the subject of multiple whistle blower initiated fraud actions as well as investigations and actions by multiple states and even their own consultants from 2004 through 2006. The allegations allege fraud in a variety of forms as well as other unsavoury and risky practices for consumers. Caremark denied them but paid US $137 million on behalf of AdvancePCS.
It is interesting that in spite of the ongoing investigations Medicare awarded large contracts to Caremark and other prescription benefit companies under President Bush's new industry favourable Medicare laws. These groups had spent US $770,000 lobbying congress.
As the fraud trial approached Scrushy had replaced his high powered legal team with lawyers who would relate to the local community and the jurors selected from it. The jury was selected in January and it was a predominantly black jury. The trial commenced with opening statements.
Scrushy's trial drew to an end in May. Jurors struggled to reach a verdict repeatedly asking for guidance from the judge. The trial and the instructions from the judge were extremely complex and confusing. The questions suggest that they may not have had the sophistication required to reach a decision in a case like this. There were some jurors who were holding out against the majority.
It looked as if it would be a hung jury but one holdout juror becomes ill and was replaced with a reserve. Although deliberations had to start from the beginning a NOT GUILTY verdict was reached within 5 days.
There was no clear paper trail leading to Scrushy and key witnesses were admitted felons. The prosecution were unable to prove the case to the jurors satisfaction beyond reasonable doubt. Whether any jurors were influenced by the pretrial gymnastics and so had prior convictions about Scrushy's character that might have clouded their judgment is a matter for speculation. Many were surprised by the verdict and even judges involved in the prosecution and sentencing of those who had admitted to the fraud had widely differing opinions about the verdict. It should be noted that the prosecution did not appeal the case to a higher court.
HealthSouth settled a class action by disabled citizens claiming its facilities did not supply the access to disabled citizens required by law. It agreed to do so.
The action by the SEC against HealthSouth and Scrushy had been stalled pending the outcome of Scrushy's trial. The SEC reached a a paltry US $100 million settlement with HealthSouth without admitting culpability. At the same time the judge asks the SEC to show reason why its action against Scrushy should not be dismissed. The SEC decides to proceed with the case and it is sent to mediation by the judge in September 2005. Some of the charges were dismissed in November.
After a long and costly court battle by shareholders with many appeals Scrushy is ordered to repay US $17 million to HealthSouth for a loan he received while CEO.
HealthSouth received a US $500 million tax windfall - repayment of the tax it paid on profits it claimed fraudulently but did not make. It used it to pay down debt.
In October Scrushy and Alabama governor Siegelman are both charged in a bribery case in which Scrushy is accused of using HealthSouth and IHS money to bribe Siegelman to keep him on a powerful board where he can help HealthSouth and impede competitors. He leaned on his bankers to pressure almost bankrupt IHS to pay half the bribe. Scrushy pleads Not Guilty. He was also accused of bribing members of the board to support him.
In December Scrushy sued HealthSouth for US $70 million for breach of contract. HealthSouth coutersued claiming legal expenses had cost them US $580 million because of the fraud while Scrushy was in charge. He had refused to resign from the HealthSouth board but had not attended meetings. Without an AGM he could not be voted out. With an upcoming AGM he finally resigned.
At he end of the year HealthSouth filed its 2004 accounts and issued a guarded forecast for profits. It could now hold an AGM. The first shareholders meeting since the scandal erupted in March 2003 was held . It was peaceful. The new board was formally elected ratifying the changes made.
Scrushy's bribery trial was held in Montgomerry, Alabama. Scrushy attempted the same television evangelist strategies employed in Birmingham but with less impact. His lawyers challenged the under-representation of blacks on the jury. They overplayed the race card. T In June 2006 the jury took only two weeks to find both the governor and Scrushy guilty of bribery. An appeal for a new trial was rejected. Scrushy went to prison.
Only one of the staff accused in the accountancy fraud elected to deny the charges and defend himself. He was convicted in 2006 and received the longest jail term of all, longer than the principle participants who had pleaded guilty.
2005 was not a profitable year. HealthSouth completely restructures its US$3 billion plus debt so that it will not have to repay debt for several years.
HealthSouth sold its only hospital in Melbourne, Australia.
During 2006 and 2007 Caremark was caught up in the stock option scandal. It reached a US $7.5 million settlement with shareholders but was not prosecuted by government. State governments imposed greater transparency and control over the pharmacy benefit companies in a attempt to stop what was happening.
In August an appeal court upheld a court order forcing Scrushy to repay US $47.8 million in bonuses to HealthSouth.
One of the shareholder class actions had claimed US $8 billion from HealthSouth, Scrushy, multiple HealthSouth employees, Ernst & Young, UBS and multiple other parties. HealthSouth now negotiated a separate civil settlement with the shareholders for US $445 million. It then joined them in their action against the other parties.
The financial situation was still tight in 2006 and HealthSouth was still losing money. It moved to concentrate on post-acute care and divest its outpatient rehabilitation division, its diagnostics division and its surgical centres. This is a considerable downsizing.
It relists on the New York Stock Exchange 3 1/2 years after it was delisted. Its forecasts profitability in 2007 and by March 2007 its share price was about US $23 showing investor confidence.
Early in the year Caremark won a key law suit. The court rejected claims that it had a fiduciary duty to those it served. This put many of the cases against Caremark and others in the sector in jeopardy. I am not sure how to interpret this but to me it seems that the law is affirming the marketplace view that companies operating in health and aged care do not have a responsibility to the patients, the community and their representatives. Sick Citizens are on their own and must fend for themselves - patient beware! Those providing care do have a prime responsibility to their shareholders who consequently (in theory at least) do not have to worry that they will be misused. The law is affirming what we now know happens.
Later in a contentious takeover Caremark was acquired by the giant CVS drug store chain burying itself and its ongoing legal problems in that company.
The action against Scrushy by the SEC is finally settled for only US $81 million. Past payments are t be taken into account and it is doubtful whether he will pay even that as he claims legal fees have consumed all of his resources.
HealthSouth sells off its money losing surgical centres and its outpatient rehabilitation centres for about US $1.15 billion which it will use to pay down debt.
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This page created July 2003 by Michael Wynne
Revised and Updated October 2007